Most fixed annuity buyers do not realize that the guaranteed rate in their anuity can be reduced at any time without notice. It is also in most cases retroactive.

“The insurance companies invested typically in bonds,” explains Edwin Lichtig of California consulting firm Pension Income, LLC.“If interest rates go up, the value of bonds goes down, which may reduce or even eliminate their financial cushion. And interest rates have nowhere to go but up. That’s a risk they’re not prepared to take.”

The problem is the optional Life Income Benefit rider that promised retirees who signed up for it at least 5% a year for the rest of their lives.

When the market was doing well, that innocent-looking add-on earned the Hartford a cozy 0.75% annual surcharge in exchange for guaranteeing a level of income well below what the underlying investments were earning.

Now that 5% has become a pipe dream, the profit center has the potential to cost the company dearly, which is why they’re offering people a lot more than the contracts are currently worth to take their cash and walk away.

“We are paying a premium above the current account value,” says Barbara Bombara, who’s running the buyback for the Hartford.

“When we look at the offer that we’re making, we do think this will be attractive.”

Anyone who wants to surrender their Lifetime Income Benefit annuity can do so with no penalty and get the full surrender value plus up to 20% of the base on which the Hartford calculates annual payments.

When an insurance company guarantees a policy watch out. When situations change and the contract goes against the insurance company you will lose.

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